Category: US – Mexican Trade

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Image: hurd.us.gov

Last Friday, POTUS announced that he was considering just dropping the NAFTA agreement. His announcement sent the Mexican Stock Market racing down with the fall continuing today:

Source: Patrick Hill, The Progressive Ensign – 6/5/2018

When President Trump was elected in November of 2016, the Mexican market tumbled, then regained when it seemed the Administration would negotiate in good faith. Then, late 2017 threats and bullying started with the latest swoon when POTUS wanted to just pull out of the agreement.

The administration continues to use a ‘whack a mole’ policy approach, even with Vice President Pence suggesting last week that the NAFTA agreement should be renegotiated every 5 years. Trade agreements are complex, legal documents which business leaders, consumers and government policy makers depend upon in making economic, infrastructure and industry plans for 10 to 20 years into the future. Corporations when they plan for building a manufacturing plan, are looking at government trade policies and trends over the next 10 years to determine whether a plant will be profitable or not. Policy makers can’t be changing the rules of the economic game constantly.

We are concerned that the anti-Mexico trade policies of the administration will continue to cause uncertainty, chaos and severe trade constraints driving the Mexican economy into a recession or worse. Mexico is the second largest trading partner for the US. States like California and Texas depend on exports to Mexico and will be hurt if the Mexican economy continues to slide:

We know from research that when the Mexican economy does better, immigration from our south of the border neighbor goes down.

Sources: Five Thirty Eight, PEW Research, The World Bank – 2/28/17

The GOP administrations needs to start treating Mexico with dignity, respect and partnership – which they have earned as our southern neighbor and ally. When the Mexican people are prospering, they don’t seek jobs in the US. So, instead of withdrawing support for NAFTA which our farmers and other businesses throughout the US are profiting by, focus on the main issue which is the imbalance in autos, trucks, automotive parts and manufacturing as the chart below describes:

Sources: US Census Bureau, The Wall Street Journal – 6/2018

Let’s start using evidence, facts and real insights in negotiating our agreements with our allies instead of bullying, prejudice and smear tactics. We recommended over a year ago, that the Administration, focus on the automative industry imbalance, and protect worker jobs and US businesses:

Tax companies that move jobs to other countries. For example, a company moves a $1 billion plant with a 1000 workers offshore, they pay a 10 % plant offshore tax or $100M, and $20k per worker or $20M penalty to be used for training and apprenticeship programs in the US. (Tax the action we don’t want.)

Establish worker councils in corporations to make decisions jointly, ensuring apprentice and new job training programs are in place.

Offer incentives to keep plants here including fed, state, and local tax reductions, and training programs implemented in local universities and colleges.

Train US workers on advanced assembly and use of robotics in manufacturing to build increased productivity capability and reduce costs.

After declaring two weeks ago a trade truce with China, POTUS declared last week that 25 % tariffs would be imposed on $50 billion of Chinese of Chinese goods if they don’t commitment to purchases of US energy and agriculture products. Commerce Secretary, Wilbur Ross left China on Sunday with no real progress except to make the Chinese angry, confused and upset.

The bullying, intimidation, zero sum negotiating tactics may work in the rough and tumble of New York real estate but not international trade where over 70 years of careful negotiations by all the major trading partners have put into place a trading platform with rules and fairness wherever possible. Now it is true that some nations take advantage of the slow, ponderous and confusing decision making of the World Trade Organization. But blowing up the present trade agreements by saying things like Vice President Pence said last week to Canada and Mexico that the NAFTA agreement should be revisited every five years is insulting, duplicitous and lacking in good faith. So last Friday, to heap more chaos on the NAFTA negotiations POTUS says he is thinking of just pulling out of NAFTA completely. Welcome to a POTUS caused trade war, we call The Trump Trade War (TTW), as history books will likely record.

Prime Minister Trudeau of Canada has condemned the way the US administration has been treating a valued partner calling the actions “frankly insulting”, and in return he receives more trumped (pun intended) up national threats. He continued in an NBC interview:

“The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat?” Trudeau declared. “Our soldiers who had fought and died together on the beaches of World War II… and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.” Maybe our POTUS doesn’t understand that dying for a common cause is a higher value than provoking, bullying and intimidation to make an extra short term buck.

EU ministers are confused and upset at being grouped in with China in steel and aluminum tariffs. The United Kingdom, France, Germany, Mexico, Canada, Turkey and Japan have either announced or launched retaliatory tariffs on US goods and are reviving trading alliances that the US has abandoned like the TTP (Trans Pacific Partnership).

Sources: The Wall Street Journal, The Daily Shot – 6/4/18

The TPP non – US nations are in a dialog with China who is excited about filling the role the US once occupied. Experts note the long term effects and loss in business for the U.S., Adam Posen, president of the Peterson Institute for International Economics observed, “It will be hard to establish trust in the U.S. again, and all the uncertainty will drive down investment and productivity.”

US businesses are busy trying to minimize the damage to their export revenue streams,. Farmers in the midwest have already found that China has cancelled some sorghum shipments causing ships to be turned back, as the Chinese are making deals with Russia for agricultural goods. American businesses are being cut out of customer contracts now, resulting in lost business that will be extremely difficult to get back once new suppliers are in place. Still incredibly, the White House trade team blows up the present world-wide trade framework replacing it with nothing, which results in uncontrolled reprisals and chaos. Seems like economic missiles have been launched and attacked nations are sending economic missiles back (sounds like a trade war to us, the TTW (Trump Trade War).

Next Steps:

To begin, our political leaders need to stop being invisible as the world trade fabric unravels. Next Congressional leaders need to bring all key trade factions, business and trade representatives and develop an alternative to the destructive protectionist policy now being implemented. Sound trade policy based on win – win negotiations, fair agreements, protections for labor, working within the WTO, and legal order will win over allies and concessions from adversaries. The GOP administration needs to stop going it alone, and work with our allies, build consensus, and make improvements in the present painstakingly developed agreements over the past 70 years. Over 1100 economists, the US Chamber of Commerce and world leaders have condemned the declared TTW which needs to end now.

(Editor Note: This is the third in a series of posts examining the polices of the new GOP administration.)

The View:

In the past week there has been a series of threatening tweets from POTUS45 to President Nieto telling him that if the trade imbalance is not fixed he will impose a 20 % tariff on all imports from Mexico. In a vacuum it may seem like this would save US jobs. Yet, the facts are that the US depends on Mexico to purchase $235 billion of exports each year. Damaging the Mexican economy will cause a loss of jobs and purchasing capacity by Mexican workers leading the loss of US jobs. The solution is to tax those actions we don’t want like manufacturing plants and jobs being moved to Mexico and offering incentives to companies to hire and keep workers here for advanced manufacturing and automation.

The Story:

We need a win-win trade relationship with our southern neighbor. The number of illegal immigrants in the US has dropped to an all-time low of 10.9 million based on an analysis by Robert Warren at the Center for Migration Studies of US Census Bureau data. Also, his study shows that immigration by Mexicans to the US has dropped by 7 % over the past few years while immigration has increased by 5 % from Central American countries. Experts believe one factor in the reduction of immigration is the improved Mexican economy providing better wages for Mexican workers. In a recent interview with the Wall Street Journal a worker describes how his life has changed:

“Alexander Calderón, 46, grew up the son of a farmer in a rural part of the Mexican state of Veracruz. He started working at Metalsa welding frames for Chrysler trucks in 1993, initially earning 600 pesos, or about $194 at the time, per month. He now earns 40,000 pesos, $1,860, per month as a supervisor in the plant’s steel hydroforming division, owns a house in the Monterrey suburb of Guadalupe, and sent his oldest son to study accounting at the state of Nuevo Leon’s public university.

“For me, I really started to notice the development of industries here in the last 15 years as companies from other countries came here. That’s when my salary started to go up,” Mr. Calderón said. “It’s gotten very competitive.”

Mexican workers with good jobs has dramatically reduced their desire to migrate to the US. Trade reduces crime, and integrates the economies of both countries more closely. For example, before NAFTA cars sold by Mexico had only 5 % US content, today they have 40 %. When both countries prosper through a productive partnership workers will enjoy a better life. Yes, there has been a loss of US auto industry jobs but a trade war would cost US jobs too. The Center for Automotive Research estimates that a 35 % tariff on imports would cause a loss of 450,000 car sales, leading to 6700 jobs lost in North America in both the US and Mexico and a loss of 31,000 jobs in US parts supply chain companies.

However, it is estimated that only 18 % of the loss of all US manufacturing jobs has been caused by overseas job placement according to a recent Ball State University study. 82 % of manufacturing job losses are due to automation. Auto plants in both the US and Mexico are highly automated.

The latest round of tweets between POTUS45 and President Nieto on NAFTA trade has resulted in a standstill and cancellation of their planned meeting next week. Even though talks are at a standstill the series of US threats has badly damaged the Mexican economy already. As noted in our Economic News section, since November 8th the Mexican Peso has dropped in value against the dollar by 13 % and the Mexican stock market dived by 20 %.

The US exports 50 % of the gasoline that Mexicans purchase. If Mexican companies are hit with a 20 % tariff on exports to the US, Mexican corporate sales to the US will drop. Mexican firms will be forced to lay off workers. Unemployed Mexican workers will buy less US gasoline. Then, US oil field workers lose their jobs. Is the tariff policy trading US auto industry jobs for oil worker jobs?

This chart outlines by industry sector the exports and imports between the US and Mexico in 2015 (right click to enlarge the chart under a separate tab):

The largest trade imbalance with Mexico is in auto parts, trucks, buses, cars and crude oil. The US ships more computer technology, telecom gear, and gasoline to Mexico than we import. Note Mexico is a major oil exporter, shipping oil here for refining into gasoline then piped back to Mexico. What would a 20 % tariff on Mexican oil do to the US gasoline industry?

Prior to the 1994 NAFTA agreement with Mexico, Mexico ran a trade deficit with the US. Since then Mexican imports to the US have exploded from $65 billion per year to $295 billion in 2016. While US exports to Mexico have jumped from $68 billion to $235 billion, particularly boosting the economies of the border states like Texas, New Mexico and Arizona. Yet, there is a US trade deficit of $60 billion in 2016. What should the solution be to keep companies investing in the US and saving US manufacturing jobs?

The Solution:

While the NAFTA trade agreement should be reviewed for fairness for both countries and workers, in the meantime taxes and incentives are the preferred approach:

Tax companies that move jobs to other countries. For example, a company moves a $1 billion plant with a 1000 workers offshore, they pay a 10 % plant offshore tax or $100M, and $20k per worker or $20M penalty to be used for training and apprenticeship programs in the US. (Tax the action we don’t want.)

Establish worker councils in corporations to make decisions jointly, ensuring apprentice and new job training programs are in place.

Offer incentives to keep plants here including fed, state, and local tax reductions, and training programs implemented in local universities and colleges.

Train US workers on advanced assembly and use of robotics in manufacturing to build increased productivity capability and reduce costs.

Editor Note: References for this article are under the Research tab in US – Mexican Trade Trends.)